Managers push for more structural Eurozone change after rate cuts

Fund managers have said Europe’s central bank cutting its key policy interest rate to below 1% for the first time ever was unsurprising, and still fails to tackle the region’s key problems of high sovereign debt and anaemic growth.

The European Central Bank under Mario Draghi (pictured) cut its main policy rate by 0.25% to 0.75%. The Frankfurt-based bank also cut the rate it pays banks holding money with it overnight, to zero.

Across the Channel, the Bank of England held its rate steady, but boosted money printing by £50bn to £375bn.

Azad Zangana, European economist at Schroders, said: “The cut in the ECB’s interest rates will be marginally beneficial for the Eurozone economy, but by no means removes the risk of recession in the near-term, nor resolves the sovereign debt crisis.

“No announcement has been made yet on whether the ECB will hold more Long Term Refinancing Operations (LTROs) auctions, though we expect more LTROs to be unveiled at the press conference later this afternoon.”

John Velis, head of capital markets research EMEA at Russell, said the move was not surprising “nor will it make much of a difference. The problem in the eurozone is not that policy rates are too low, but rather a sovereign debt crisis in a monetary union that still lacks the centralised policy tools to deal with it.

“Banks aren’t lending to anyone but their sovereign governments. They aren’t lending to the private sector because they wish to hoard cash and keep their weak balance sheets from getting ever more extended, and anyway, demand is severely repressed. They are only lending to their local sovereign because they depend on that sovereign to keep themselves solvent.”

The ECB’s move was an attempt to get banks lending to one another, not just parking money for the short term in Frankfurt, but Velis said the ECB’s move was “a recipe for Japanese-style ‘zombie banks’.”

Velis said the recent deal by Eurozone politicians to establish a supranational banking regulator was “one of the minimum requirements for the summit to be seen as a success [but] implementation risk is high, as is the delay in creating something concrete. Plenty of room for discord exists.”

He added: “The growth outlook in Europe continues to worsen, making the fiscal dynamics ever worse in many countries like Spain and Italy. This may lead us to depend, as ever, on the ECB’s potential intervention to make up for shortfalls in the size of the ESM.”

He added: “The summit superseded (very low) expectations. The market response was quite positive on Friday as a result. Nevertheless as far as it goes, we don’t think the summit achieved anything close to solving the problems in Europe, nor did it eliminate the likelihood of further deteriorations in the outlook in time. As a result, we do not think it constitutes the necessary ingredients for a full-on return to a ‘risk on’ market scenario.

“What it did do, is create some useful short term support for Spain and potentially Italy. Bond yields will not spiral out of control and the Euro won’t break up this month nor this summer. Just when we thought there was no more room on the road down which the can could be kicked, nor any strength in the legs to kick it, it was given a good whack.

“We have returned to ‘muddle through’, but also seen a few positive and necessary developments for the longer term – but not nearly enough.”


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